Baccardax: The Real Nationalized Banks

The French philosopher and mathematician Blaise Pascal devoted the final years of his short life to scientific studies of faith.

In his famous theory of "The Wager," he argued that belief in God, even in the absence of evidence, is the safest bet, as it offers unlimited upside and no potential downside.

The role of the world's central banks doesn't reach quite this scale of profundity, but Pascal can help us think about how we view their independence: you either bet that they are or you bet they're not.

Right now, the smart money's on the latter.

Acres of forest have gone to the blade while the mainstream media has debated the issue of bank nationalization, but few if any seem to be prepared to address what seems obvious: the most important banks are already under government control.

The Federal Reserve's balance sheet has nearly doubled in size to around $2 billion as its (directed) activities have led it into myriad lending arrangements, orchestrated mergers, billions and billions in swap lines and a central role in the $700 billion TARP program first conceived by the Treasury.

Richmond Fed boss Jeffrey Lacker has recently expressed his concern about this newly-minted role for the bank, telling the National Association of Business Economists that he would prefer it focus its mandate of inflation and employment through Treasury bond purchases as opposed to directed private lending.

Like others, Lacker is concerned that the inflationary pressures of all these activities will rear its head before the credit dislocation eases. If so, how does the Fed react? Does it pull the plug on it credit life support to the financial sector and tackle inflation, or does it keep pumping in cash and let the beast rise from the depths?

Dr. Nouriel Roubini, and NYU Economist, thinks they might be tempted to let inflation -- "the path of least resistance" -- accelerate, especially if there's a political dimension to their policy decisions.

"The lines between central banks and governments are becoming fuzzier," he has said.

No more so than in the UK, where the Bank of England is now dangerously near the end of the bullets in its monetary-policy chamber. Mervyn King & Co. have now famously embarked on the path of quantitative easing (please, NOT printing money) courtesy of a £150 billion ($207 billion) check from Alistair Darling and the Exchequer, who will even have a voice in what assets are purchased.

Bank of England director Paul Tucker told lawmakers in January he wasn't terribly concerned about maintaining and independent monetary stance in the wake of the Asset Purchase Facility, but others aren't so sure.

Either way, the UK Government has, directly or indirectly, assumed more than £1.1 trillion in contingent liabilities of the banking sector since this crisis began. That's roughly and entire year's worth of gross domestic product. It's not just in the game, it IS the game. And the Bank is now working for it.

Similar lines are being blurred in Japan, where incoming Finance Minister Kaoru Yosano has made all the right noises about Bank of Japan independence, but has critics pointing to his previous role overseeing fiscal and economic policy, where he called for lower lending rates and an expansion of the BoJ's corporate lending.

In truth, only the European Central Bank seems the most overtly independent rate setter (let's face it, would it be that slow off the mark to read the inflation head-fake if politicians WERE pulling the strings?) but even it has had to deal with accusations that it's effectively an adjunct of the Bundesbank.

At the end of the day, though, it's hard to get past the notion that if the next and only tool for most banks is the purchase of assets (or the creation of capital) then the men and women paying for that tool are going to want a say in how it's used.

Political expediency raises the specter that the current swathes of liquidity (the US alone as spent or pledged $9.7 trillion) will be left to grow unchecked as unemployment (which lags growth) continues to rise.

If that happens, it's going to be a lot safer to be on the right side of our modern-day version of "The Wager."